Path Dependency and Institutional Structures

Football has deep historical roots. This history has an interest in its own right which is not explored here, but it is necessary to recognise the extent to which football carries its past both into the present and into the future. It does so partly as a matter of choice through seeing the past as a proud heritage at player, club, league, national and international level. But it also does so because of what economists call ‘path dependency’, the extent to which initial conditions remain important and firms, economies and systems get locked into certain patterns of behaviour.

In recent decades the scale of football as a sport and a business has grown. In 1991/1992, the top two divisions of English football (the first and second division) generated combined revenues of £228m (Deloitte, 2007). By 2010/2011, this had risen to £2.7bn, with £2.3bn being generated by the Premier League (Deloitte, 2012). With this growth there have been major changes in football’s organisation but the competitions and problems which exist today also continue to reflect older and deeper issues. Not the least of these is a question over the purpose of football,

and the way that this is then reflected in tensions in the different organisational structures and distributions of power.

Running alongside the economic history of football has been the issue of commercialisation. For

some this is the root of all evil, but for others it is the core of the sport as a modern business (Vamplew, 1988, Williams & Neatrour, 2002, Meier, 2008). Such attitudes have helped to

generate further tensions between the different entities and actors present in English football.

The recent deeper commercialisation of football has intensified the tension between the sporting and economic aspects of the game. But such conflicting perspectives emerged early in the game’s development.

Football originated from the upper class public schools in England, with different schools playing under different sets of rules. The main difference that emerged was in the nature of physical contact and whether hands could be used, leading to a distinction between ‘rugby’ and ‘soccer’.

To overcome the issues relating to these differences, the Football Association (The FA) was formed in 1863 to develop a formalised set of rules for ‘soccer’ (Banks, 2002).

In the early years after its formation, football was still the preserve of the upper-classes with games played between southern-based public schools competing for the Challenge Cup (Williams & Neatrour, 2002). The formation of the FA Challenge Cup in 1871 was one of the crucial early institutional developments. It was during the 1870’s that football began to increase its appeal as economic growth and increased leisure gave more people time to spend playing or watching football (Russell, 1997). With these developments, some football clubs soon

considered that money could be made from selling match tickets to FA Cup matches. (Buraimo et al, 2006). However, the FA argued that football should not be played for the benefit of

(Williams & Neatrour, 2002, p2). There was, thus, an early and direct conflict between the FA and those clubs which saw the adoption of a spectator sport model as a method of generating income.

The FA during this time was controlled by gentlemen amateurs who sought to protect football from commercial exploitation (Buraimo et al, 2006, Meier, 2008). They rejected any notion that players should be paid for their labour, and they also insisted on ‘fair-play’ (Conn, 2005).

Payment of players was seen as being against the ‘spirit’ of sport (Williams & Neatrour, 2002).

However, as the game expanded into working class areas, clubs in the Midlands and the North took a different perspective to the southern based clubs and the FA. Clubs from working class areas were willing to pay players despite the southern based clubs viewing this as a form of cheating and covert professionalism. In response, the northern based clubs considered forming their own breakaway association (Banks, 2002). Eventually, this tension forced the FA to accept professionalism in 1885 as its stance towards non-professionalism had become untenable (Buraimo et al, 2006). But this acceptance by the FA of a degree of professionalism was done in part to constrain it (Meier, 2008). A number of regulations were also created at this time which sought to control the commercialization of football, alongside protecting the clubs themselves.

This included a restriction on the level of dividend which could be paid to club directors.

The operation of a football club at this early stage was on a voluntary basis (Dobson & Goddard, 2011). English football clubs initially operated primarily as sporting clubs. A club would be run by an elected committee, which was also liable for any debts incurred by the club. English law dictated that financial transactions entered into by a club committee were the personal liability of club committee members. However, with the adoption of professionalism this structure became unsustainable as clubs had to invest in order to build stands and sign players. The result

was that the financial burden for the majority of committee members became too great (Buraimo et al, 2006).

As a result of these weaknesses, most clubs became private limited companies. In this system,

‘owners’ gained protection in law but ownership tended to be invested in the hands of wealthier individuals. By 1888 it was recommended that football clubs with a turnover of over £1,000 should convert from the private association sports club model of operation to the limited liability model of ownership (Morrow, 2003).The first club to take this route was Small Heath (now Birmingham City) in 1888 (Williams & Neatrour, 2002), though football club owners at this stage were still predominantly drawn from the local business community (Buraimo et al, 2006, Dobson

& Goddard, 2011, Williams & Neatrour, 2002, Williams & Hopkins, 2011).

The motivations of the individuals who invested in football at this time stage were often non-economic. Many of these individuals tended to be successful businessmen who were also supporters of the club (Szymanski & Hall, 2003). Investment was linked to a sense of civic pride and duty, particularly in the event of financial difficulties (Buraimo et al, 2006). The investment was also driven by other factors such as prestige, power, and group identification (Sloane, 1971).

Investment into a local football club could generate an economic benefit to an owner through additional promotion or income for their other business interests but this tended to be a secondary concern (Williams & Neatrour, 2002). Club directors were considered as ‘custodians’

of the club, and the football club was effectively operated as a form of public amenity (King, 1997). As a result, football clubs elected to keep ticket prices low in order to keep matches affordable (Kelly et al, 2012), to ensure a continuing close tie to the local community.

This distinctive form of ownership and ‘business’ was re-enforced by the most prominent

club directors. As a result of this rule, dividends were restricted to 5% of the nominal values of shares (Williams & Hopkins, 2011, Dobson & Goddard, 2011). The FA regulations also required that the existing chairman must approve any transfer of shares (thus eliminating the chance of hostile takeover) and, in the event of bankruptcy, a requirement was framed which would ensure the ownership of a club’s assets would transfer directly to the FA (thereby limiting the chance of asset-stripping) (Conn, 2005). Alongside these rules, the FA also imposed the “retain and transfer” system and in 1904 imposed a maximum wage for players. These two measures helped to restrict both player mobility, and the level of economic competition between clubs (Buraimo et al, 2006). Taken together these various measures helped to define football club ownership as effectively a not-for-profit activity (Dobson & Goddard, 2011).

Alongside the limited adoption of professionalism was the creation of the Football League in 1888. The Football League was initially made up of twelve clubs, all of whom were drawn from the midlands or the north. In 1882, the league expanded to twenty eight member clubs, and added a second division. By 1904, the Football League had forty member clubs (with twenty-two from the north or midlands), and regionalised divisions were created between 1920 and 1922, which helped to increase the level of participation from southern based clubs. By 1924/1925, the total number of clubs had reached eighty-eight, with the final expansion to ninety-two clubs across four divisions taking place in 1950/1951 (Williams & Neatrour, 2002). The Football League ensured that member clubs in each league would play each other in regular fixtures, which would guarantee those clubs more income security. However, the operations of the member clubs would be significantly regulated. In contrast to the FA, the Football League was not

opposed to professionalism and commercialism in football. Despite this, a feature of the Football League was that it would redistribute revenue from the larger clubs to the smaller ones (Conn, 2005). Over time this redistribution mechanism would prove to be problematic as the larger

clubs grew, and saw themselves constrained by having to share revenues with smaller rivals (Buraimo et al, 2006).

The presence of these two institutions, created a dual governance structure where lines of accountability were blurred (Meier, 2008). The activities of the Football League were partly constrained, and the Football League even introduced its own cup competition (the League Cup) in 1960, in order to help to change the power balance in English football (Hopkins, 2012).

This potentially conflicting organisational structure remains today. Different clubs compete in different leagues and are dependent upon their position in the football pyramid. The leagues are organized on an open basis, with promotion and relegation permitted between divisions (Noll, 2002). At the apex of the pyramid since 1992 has been the Premier League, the top division of English football with twenty member clubs. The next three divisions are controlled by the Football League, and consist of seventy-two member clubs. The divisions below the Football League are considered as ‘non-league’, although the fifth tier of English football known as the Football Conference has a number of professional clubs. Below this level, English football is made up of semi-professional and amateur clubs, with leagues organized on a regional basis.

English football continues to be governed by the FA which, like other European national

associations, is a member of the European governing body, UEFA. UEFA is then a member of the global governing body of football, the International Federation of Association Football (FIFA) (Ducrey et al, 2003).

Alongside the national competitions, English football also developed a supranational element.

This began as the European Cup and the Inter-Cities Fairs Cup in 1955. At this time both

tournaments were based upon on a knockout structure with a small number of teams involved.

European Cup becoming the Champions League in 1992, and the Inter-Cities Fairs Cup becoming the UEFA Cup in 1971 and subsequently the Europa League in 2009. The expansion of these tournaments increased the number of matches played between European clubs through having preliminary knock-out stages, followed by separate group and knock-out stages. The benefit of this change was more matches and revenue. In England, the Champions League qualifiers are currently the top four teams at the end of each Premier League season, while the Europa League is open to clubs who finish between fifth and seventh, depending on the winners of the domestic cups. A similar system is in place across Europe depending on league strength. The number of European places is determined by the strength of a league’s performance in European competition. This is calculated through UEFA’s coefficient system.

As football developed in the UK, there were elements of change in its institutional structure and business behaviour. But a significant contrast still existed between the pattern before the 1990s and that which developed subsequently. The key elements of the contrast with the later pattern are set out in Table 2.1.

Despite the removal of some restraints, football in England prior to the formation of the Premier League (pre 1990’s) was heavily regulated. Indeed, the FA indicated that the most important objective for a club owner was to provide entertainment through a football match (Sloane, 1971). This implied the sporting aspect of a football club was considered to be of greater importance than the non-sporting aspect, with the owner essentially a ‘custodian’ of the club.

Table 2.1 Changing Business Approaches to English Football

(Source: Adapted from Meier, 2008)

The notion of aggrieved actors had a dual emphasis. Firstly, it related to club owners, and directors who wished to maximise the financial performance of their club, but secondly, players were also ‘aggrieved actors’ particularly during the 1950’s. The imposition of the maximum wage negatively affected the earning potential of professional footballers, and this restraint was removed in 1961 (Szymanski, 2006). Figure 2.1 shows the major sources of revenue prior to the 1990s.

Issues Pre 1990s 1990s to date

Power balance and

regulatory capacity Dual governance structure, low capacity of the governing

within professional football Low degree of redistribution, fierce resource competition Corporate governance and

financial regime Corporate governance heavily regulated, but elements of a

professional footballers Restrictive player labour market regime to control

market regime Commercialized product market, liberalized labour market.

Institutional

complementarity Low, self-defeating features

putting stability at risk. Low; financial losses despite heavily increased revenue streams

Aggrieved actors Owners, Directors, and others with an interest in

commercialisation

Supporters and community actors

Figure 2.1 Major Revenue Streams for football clubs prior to the formation of the Premier League

The dominant form of revenue prior to the formation of the Premier League was generated from ticket sales. Revenue sources from sponsors, television, and other commercial sources were less important at this time (Andreff & Staudohar, 2000). Shirt sponsorship, for instance, did not begin on a large scale until the 1980s. Due to antiquated facilities, football clubs were also unable to generate significant revenue streams from commercial sources on a match-day such as

hospitality, and there was little competition in the television market even though football began to be televised in the 1950’s. During the early stages of televised football, only two providers (BBC and ITV) competed for rights to matches. Through this lack of competition, the revenues generated from television were limited and this re-enforced the reliance on ticket income for football clubs.

For the top clubs in the pyramid the system of revenue generation was cause for much

frustration. As gate receipts were the most important income stream, the Football League had put in place a system of revenue sharing between clubs (Buraimo et al, 2006). This mechanism was a method of protecting smaller clubs, and improving competitive balance. However, for larger clubs, such a system was not beneficial as they were forced to support smaller clubs lower down the pyramid. With the failure to adequately generate revenues from other sources, this created a group of ‘aggrieved actors’ who pushed for institutional change.

Revenue Ticket Sales

Television Commercial